Celsius Holdings, Inc. (NASDAQ:CELH) Q3 2023 Earnings Call Transcript

Celsius Holdings, Inc. (NASDAQ:CELH) Q3 2023 Earnings Call Transcript November 7, 2023

Celsius Holdings, Inc. beats earnings expectations. Reported EPS is $0.89, expectations were $0.51.

Operator: Greetings, and welcome to Celsius’ Third Quarter 2023 Financial Results. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cameron Donahue, Investor Relations for Celsius Holdings. Thank you. You may begin.

Cameron Donahue: Thank you, and good morning, everyone. We appreciate you joining us today for Celsius Holdings Third Quarter 2023 Earnings Conference Call. Joining me on the call today are John Fieldly, President and Chief Executive Officer; and Jarrod Langhans, Chief Financial Officer. Following the prepared remarks, we’ll open the call to your questions at that time. The company released its third quarter earnings press release earlier this morning, and all materials are available on the company’s website, celsiusholdingsinc.com as well as on the SEC’s website, sec.gov. As a reminder, before I turn the call over to John, an audio replay will be available later today and can be accessed with the same live webcast link in our conference call announced in our press release.

Please also be aware that this call may contain forward-looking statements, which are based on forecasts, expectations and other information available to management as of November 7, 2023. These statements involve numerous risks and uncertainties, including many that are beyond the company’s control. Except to the extent as required by law, Celsius Holdings undertakes no obligations and disclaims any duty to update any of these forward-looking statements. We encourage you to review in full our safe harbor statements contained in today’s press release and our quarterly filings with the SEC for additional information. Additionally, management will share operating results on both a GAAP basis and a non-GAAP basis. Descriptions of those non-GAAP financial measures that we use such as non-GAAP adjusted EBITDA and reconciliations of these measures to our results as reported in accordance with GAAP are detailed in our earnings press release for the third quarter of 2023.

With that, I’d like to turn the call over to our President and Chief Executive Officer, John Fieldly, for his prepared remarks. John?

John Fieldly : Thank you, Cameron. Good morning, everyone, and thank you for joining us today. Celsius achieved record sales in the third quarter that totaled approximately $385 million, up 104% from $188 million for the prior year third quarter. This was driven predominantly by North America revenue, which increased 107% to $371 million, up from $180 million for the prior year third quarter. Celsius continues to be the top driver of growth in the energy category, both in dollars and units through tracked channels. Celsius is the number one dollar and unit growth brand over the last 52 weeks per IRI total U.S. MULOC energy category data ending October 8, 2023, growing approximately $950 million incremental dollars, up 144% versus a year ago while representing 28% of all category dollar growth.

In addition, our unit growth totaled $289.2 million incremental units, an increase of 114% versus a year ago, and totaled 39% of all category unit growth. Per IRI, in the four-week period ending October 8, 2023, in MULOC, Celsius is the number three energy drink brand in the U.S. with approximately a 10.5% market share, more than doubling its 4.4% share in the same period last year. This dollar growth on 10.5% share has not been achieved in the last decade. We continue to see growth across all channels, both tracked and non-tracked, with our club channel sales totaling approximately $63.2 million for the quarter ending September 30, up 83.3% year-over-year compared to $34.5 million for the prior period third quarter. Per stacked line on Amazon, over the last 14 weeks ending September 30, 2023, Celsius is now the best-selling energy drink on Amazon with approximately a 21.4% share in the energy category, ahead of Monster at an 18.6% share and Red Bull at a 13% share.

Our third quarter 2023 Amazon sales totaled approximately $22.2 million versus $15.6 million for the year-ago period, an increase of approximately 42%. Celsius is now the number one energy drink brand on Instacart and continues to outpace that category of growth as the largest and fastest-growing brand on the platform. We continue to expand our growth opportunities in non-tracked food service channels and are gaining more distribution points at colleges, universities, hospitals, hotels, eateries, casinos and more. Overall foodservice continues to exceed approximately 10% of our PepsiCo revenues, and we see this area as an opportunity for further growth and scale. We are extremely happy with our PepsiCo partnership, and we believe there is a long runway ahead of growth across a variety of channels, including expanding at retail, convenience and foodservice.

During the quarter in foodservice, I’d like to highlight that Celsius is now available in over 2,000 Jersey Mike locations across the United States, and we’ve now gained authorization in over 3,000 Dunkin’ Donuts nationwide. This illustrates the many unique usage occasions that we are seeing and our customers are enjoying our Celsius products. As highlighted in our earnings supplement, per IRI, for the four-week period ending October 8, 2023, we have increased our market share in MULOC by approximately 138% to a 10.5% share, which has not been achieved in the energy category over the past decade versus a 4.4% share in the prior year period. In MULOC, Celsius grew its ACV to 95.6% versus 72.1% year-over-year. In convenience, Celsius gained an additional 22.6% of ACV growth versus the prior year period ending and resides at approximately 95.6% of ACV compared with a 73% of ACV in the prior year.

This provides tremendous opportunities as we continue to grow customer awareness and our national availability. International sales grew approximately 56% in the third quarter, totaling $13.6 million compared to $8.7 million in the third quarter of 2022, driven in large part by successful innovation launches, increased velocity, and brand awareness. The first major international market in which we plan to expand to under the PepsiCo umbrella is Canada, expected to launch in the first quarter of 2024. We believe there are significant opportunities for incremental growth over the next three years to five years as we execute our international expansion blueprint in a handful of countries in 2024, with opportunities for further expansion in ’25, ’26, and beyond.

We expect to provide additional details as we get closer to these dates. Beyond new markets, we are very excited about a number of our innovative launches that our team has created and have been working through, including a recent launch of our newest Vibe flavor, Cosmic Vibe, a great tasting sparkling fruit punch flavor, which is out of this world and is now available at Circle K. In addition, just recently in November, we launched a new 16-ounce line, Celsius Essentials, which is exclusively available initially at 7-Eleven through the remainder of 2023 with a nationwide rollout planned in 2024. Celsius Essentials is formulated for fitness enthusiasts looking to elevate their performance. Each can of Celsius Essentials contains 270 milligrams of caffeine, our essential aminos as well as our proprietary blend, providing you with the combination of enhanced physical performance and cognitive benefits.

This new line comes in four great-tasting flavors: Blue Crush, Cherry Limeade, Dragonberry, and Orangesicle. Net income attributed to common shareholders totaled $70.5 million in the quarter or $0.89 per diluted share compared to a net loss of $186.5 million or a net loss of $2.46 per diluted share. The prior year losses were preliminarily driven by termination expenses as we moved from our prior distribution network to the PepsiCo distribution system. Non-GAAP adjusted EBITDA increased 318% to approximately $104 million in the quarter compared to $25 million in the prior year period, driven substantially by revenue growth, an increase in margins, and our continued leverage across our SG&A. Our record non-GAAP adjusted EBITDA in the third quarter represented approximately 27% of sales.

This was driven by gross margin improvements, up 860 basis points from the prior year ago to approximately 50.4% of gross profit versus 41.8%. In addition, we saw a combination of leverage across our sales and marketing totaling approximately 19.1% of sales in the third quarter compared to 23% adjusted for distributor termination expenses in the prior year period. G&A, general and administrative expenses, totaled approximately 6% in the third quarter compared to 14.6% of sales in the prior year period. Jarrod will cover these items in more detail shortly. Our distribution partner, PepsiCo, continues to facilitate ACV expansion, supporting new customer acquisitions across broad demographics and new usage occasions. Going forward, we expect that our key incremental growth drivers are expected to be increasing our SKUs, our flavors and facings at retail, improving shelf placements, more placements in stores, secondary placements and Celsius-branded cooler placements as well as expanded independent convenience expansion initiatives as well as foodservice and increasing our velocities at shelf.

In recent calls, I’ve also cited South Florida as an example of what a more developed mature market can look like. Over the last four weeks, as of October 8, 2023, per IRI, Celsius in South Florida market share was approximately 24.1%. At the beginning of January of 2023, our market share was 17.7%. This shows the strong market share and growth the Celsius brand has achieved in the South Florida market as well as the opportunities that we see in a broader market as we look for national U.S. availability as we continue to roll out into further locations and improve our placements at retail as well as our velocities. To conclude my prepared remarks, Celsius continues to lead both on a dollar and unit growth basis in the energy category. The leverage in our operating model is becoming more apparent with incremental growth, highlighted by our 104% sales growth in the third quarter, delivering over a 300% adjusted EBITDA growth.

Our customers have been growing the category, both in demographics and usage occasions, increasing their dollar spend on Celsius. I also want to highlight the Celsius team and the amazing job they’re doing. We have added over 200 new full-time and part-time employees during the third quarter. Developing our world-class team continues to position Celsius to execute against our growth opportunities that we see in front of us while driving operational leverage to unlock greater shareholder value. I’ll now turn our call over to Jarrod Langhans, our Chief Financial Officer, for his prepared remarks. Jarrod?

Jarrod Langhans : Thank you, John. Thank you all for joining us this morning. It was another great quarter where we continued to exceed both internal and external expectations. Not only are we continuing to benefit from the distribution system of Pepsi, but we’re also delivering on increased SKU count, improved placement, increased displays and continuous improvement within velocities. We plan to continue investment in our growth in Q4 and beyond. In addition, we have seen the benefits of leverage across our business with gross margins, operating margins, and EBITDA margins all improving. As we announced last week, the company initiated a three for one forward stock split, and we expect that the common stock will trade on a split-adjusted basis commencing with the opening of trading on the NASDAQ capital market on November 15, 2023.

Turning to our third quarter financial highlights. Revenue for the three months ended September 30, 2023 was approximately $385 million, an increase of 104% from $188 million from the same period in 2022. North American third quarter revenues were $371 million, an increase of 107% from the same period in 2022. International revenue grew 56% to $14 million as we saw a recovery from the challenging environment that existed in the prior year. We attribute our sales volume growth for the quarter compared to 2022 to several key drivers, including a successful integration to the Pepsi distribution system, which has resulted in broader availability, increased SKU mix, and improved placement. We’re also benefiting from robust expansion in our traditional distribution channels and club channels with SKU increases and placement improvements all contributing.

More ever, our products are now found in several new channels within CNG and foodservice. As discussed in the prior year, there was a pipe fill in Q3 2022. We also had growth in inventory at our distributor in Q3 of 2023, which was an offset to the prior year pipe fill. As a result, inventory was not a significant component of the year-over-year percentage increase. Increased product availability has improved the success rate of our promotional activities. For the third quarter of 2023, the company received updated information related to promotional activity across our footprint and evaluated this data in conjunction with recent trends in activity, which resulted in improvements and adjustments to our promotional allowance accrual. As a result, despite increasing our promotional activity during the 100 Days of Summer campaign as a percentage of revenue, the promotional spend was consistent with the prior year period.

Gross profit for the third quarter increased 147% to $194 million, up from $79 million in the prior year period. Gross profit margins in the quarter were approximately 50% of revenues compared to approximately 42% for the prior year third quarter. The improvement is attributed to lower package and raw material costs as well as improved waste and freight lane efficiency. Sales and marketing expenses for the quarter were approximately $73 million, a decrease of approximately 63% compared to the third quarter of 2022. The decrease was due to prior year costs associated with the termination of legacy distributors as a part of the transition to the Pepsi network. Adjusting for last year’s termination expense, marketing and sales investment increased in the quarter, while SKU count distribution and velocity budgets outperformed, delivering good leverage across the sales and marketing expense lines.

As a percentage of sales, sales, and marketing was 19% compared to 23% in the prior year, adjusted for distributor termination expenses. We plan to continue investment in our sales and marketing with increased planned spend as a percentage of sales in the fourth quarter to execute strategic seasonal investment programs with our distribution product. General and administrative expenses for the quarter were approximately $23 million, a decrease of 17% relative to Q3 2022. This decrease was due to the impact of timing of legal settlements and the Func Food’s brands impairment in Q3 2022. Moving to a few comments around quarter-over-quarter activity to provide some additional insight into our recent activity. Revenue for the third quarter increased sequentially by 18%, driven by distribution gains across tracked and untracked channels as well as SKUs per location and SKU placement.

In addition to these drivers, we benefited from some inventory building within our primary distributor as well as from adjustments to our promotional allowances with some offsets to our growth as a result of mix within our SKUs and channels. An estimate of the impact of inventory, promos and SKU channel mix compared to Q2 would have been roughly $20 million. Gross profit dollars increased by 22% and gross margin improved by 165 basis points sequentially from the second quarter, driven by positive uses to our promotional allowance accounts as we maintained our leverage across raw materials, freight and scrap rates. Excluding the promotional allowance benefit, we would have had gross profit margins consistent with Q2. Looking at the first three quarters of the year, revenue for the nine months ended September 30 was approximately $971 million, an increase of 104% from $476 million for the nine months ended September 30, 2022, driven by our North American business.

North America year-to-date revenues were $931 million, an increase of 108% from the same period in 2022. International revenue grew 46% to $40 million in the first nine months of 2023. Gross profit for the first nine months of this year increased 143% to $467 million, up from $192 million in the prior year period. Gross profit margins in the first nine months were approximately 48% of revenues compared to approximately 40% for the prior year period. The improvement in gross profit margin is attributed to lower package and raw material costs and improved freight lane efficiency. As things stand today, we would expect Q4 gross profit margin to be consistent with the Q2 and full year margin profile. As a percentage of sales, sales and marketing was 19% in the first nine months of 2023 compared to 22% in the prior year period, adjusted for distributor termination expenses.

G&A expense as a percentage of sales was 8% for the first nine months of 2023 versus 11% in the prior year. Focusing now on liquidity and capital resources. As of September 30, we had cash in excess of $760 million and net working capital in excess of $879 million. Cash flows provided by operating activities totaled $136 million for the nine months ended September 30, which compares to $171 million in net cash provided by operating activities for the same prior year period. The change in cash generation was driven by an increase in net income, offset by working capital and timing benefits of transactions associated with the Pepsi share purchase and distribution agreement in 2022. Looking at inventory, total inventory in the third quarter of 2023 ended at $199 million, up approximately $46 million from the quarter ended June 30, 2023.

This was driven in large part by increases that we saw in our sales volume in addition to increases associated with innovation inventory building ahead of January launches. Going forward, we will continue to monitor inventory to ensure we are able to keep up with the growth we are expecting. At the same time, we do see opportunities to drive efficiencies in our DIO as we move into 2024. This concludes our prepared remarks. Operator, you may now open the call for questions. Thank you.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.

Mark Astrachan: I guess maybe to start, just on distribution points, any sort of benchmark you can give? Obviously, the growth has been significant. But how do we think about it in terms of where it can go? Like if you look at where Celsius’ total distribution points are versus Monster and Red Bull, they’re about 50% of those two brands. If you look at convenience stores as an example, your current distribution footprint is about 20% less than where Bang was at peak distribution. So, any sort of color you can give on kind of where you think the right level of distribution can be, maybe longer term holistically and sort of shorter-term line of sight as you head into ’24, particularly given fall and then spring resets? Thanks.

John Fieldly: Yes. Thank you, Mark. When you look at the distribution points, if we look at kind of the peers that we’re looking up to, obviously, it’s Monster and Red Bull. So over time, that is our goal and objective is to achieve those maximum distribution points, which the two leaders have in the category. I think we’re still in the earlier phase in as we — in the growth cycle and the opportunities. We’ll continue to evolve upon resets as we continue to evolve through 2024 and beyond. I think when you look at the average points of distribution and you look at we’re right around 95.6%, really need to continue to work on the total breadth within the distribution points. And we just got finished with NACS last month, which was a great show, probably the best show in company history.

A lot of excitement around some of our new innovation of our core flavors as well as further expansion upon our Vibe flavors as well as the launch of our Celsius Essentials line. So that’s our peer group. We expect over time and our goal and objective is to have the same points of distribution as Red Bull and Monster.

Mark Astrachan: Got it. Okay, that’s helpful. And then looking at the Amazon, Costco sales in the quarter, they were a little bit slower, I think, sequentially in terms of rate of growth than they were in 2Q. I get it’s a bit of a challenge to try to model that from where we all sit. But anything that you can call out there that may have played into that would be helpful, too, please.

John Fieldly: Yes. I think — I mean, you got to look at each customer somewhat differently in different channels. Also, you’re looking at a singular customer versus a category or a channel. So, I think modeling it out, it does get a little bit challenging. In regards to Amazon, when you look at the lumpiness that was in the quarter from Q2 to Q3, when we dove into the data, it really was looking at a Prime, somewhat of a Prime build in Q2 due to Prime taking place June 11 and 12, which was really successful for us. So, we did have some lumpiness there when looking at Amazon specifically. And then when you look at the club channel, which is mainly Costco and Sam’s because [indiscernible] is reported through IRI when looking at that specifically, there is some lumpiness between the two customers on load-ins.

It could be some seasonality at the end of the quarter. But both of our businesses are extremely strong in both those channels. And on Amazon, we actually gained over two points of share, which is — last quarter when we reported on the second quarter, we finished our share number at 18.6%, and we just came in at 21.4%. So almost within a quarter, we gained over 200 basis points in share. So that’s a really great achievement. The team has been working really hard, and we had a great Prime Day as well. So that’s great to see. Also, on the club business continues to be a really strong business, and we don’t really see that slowing down. We see great opportunities to further leverage additional pack sizes as we continue to scale within the club channel.

Mark Astrachan: Got it. Thank you.

Operator: Our next question comes from the line of Gerald Pascarelli with Wedbush. Please proceed with your question.